Lesson 4.2.2 Special Basis Adjustment: Applications

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Do curso por University of Illinois at Urbana-Champaign

Taxation of Business Entities II: Pass-Through Entities

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University of Illinois at Urbana-Champaign

Taxation of Business Entities II: Pass-Through Entities

10 classificações

Curso 4 de 5 em Specialization U.S. Federal Taxation

This course provides an introduction to the U.S. federal income taxation of pass-through business entities, including Subchapter S corporations, partnerships, and limited liability companies. The course focuses on the relevant provisions of Subchapters S and K of the Internal Revenue Code, as well as related Treasury Regulations and judicial opinions, governing the formation, operation, and termination of pass-through entities. Practical in-class study problems facilitate self-discovery of technical tax knowledge along with the development of a variety of professional skills and attitudes.

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Module 4 Partnership Sales and Terminations

In this module, you will be introduced to the tax consequences of selling and terminating a partnership interest. We will explore the tax consequences to the buyer and seller in a transaction to sell a partner’s interest. You will learn to differentiate between sales subject to capital and ordinary gain. Since the partner’s capital account and tax basis often differ at the point of sale, you will learn about the § 754 election, which allows the buyer to step up the inside basis in the partnership. Finally, we will discuss the implications of partnership termination.

Lesson 4.2.1 Special Basis Adjustment: Concepts6:05

Lesson 4.2.2 Special Basis Adjustment: Applications3:41

Conheça os instrutores

Michael P Donohoe, PhD, CPA
Associate Professor of Accountancy and PwC Faculty Fellow
Department of Accountancy, Gies College of Business

Let's now apply these concepts to Sunchaser Shakery.

Nicholas sold his 30 percent interest in Sunchaser Shakery Partnership.

The balances at the time of the sale are listed in the table.

Determine the buyer's share of inside basis if Sunchaser

elects section 754 at the time of the sale.

So, recall that basis is not adjusted as a result of a partnership interest transfer,

unless there is a section 754 election.

And so, in this case, we have to factor that in because we are

told that election is in play.

So, we have to look at what's the buyer's increases in their basis.

And, we do that by looking at Nicholas's capital account,

which has a fair market value of $90,000.

We compare that now to his share of the partnership assets,

which has an adjusted basis of $225,000 in total.

And he's a 30 percent partner,

so $67,500 is his share.

So, it's this difference that we're concerned with.

And given that section 754 has been elected in this case,

this difference is now allocated to the assets on the basis of relative appreciation.

So, looking at the inventory,

it's basis is $105,000 and it's fair market value is $110,000,

it has appreciated $5,000.

So, we're going to use that appreciation as

a relative basis to determine how much of the $22,500

of section 754 adjustment, to allocate.

Similarly, the land has a basis of $70,000 and a fair market value of $140,000 and thus,

it has appreciated by $70,000.

So, for the inventory,

the $5,000 appreciation over

the $70,000 and the $5,000 appreciation of all the assets,

that proportion is what we'll multiply by the amount we want to adjust, the $22,500.

In other words, we'll assign $1,500 to inventory, and for the land,

$70,000 over $5,000 plus $70,000,

the remaining portion or $21,000.

So, to determine the basis,

the inventory basis began at $105,000,

Nicholas's share is 30 percent plus the $1,500 adjustment that we computed above.

Means that the buyer share of inside basis for this particular asset is $33,000.

For the land, it has a basis of $70,000,

the interest that we're concerned with is

30 percent plus the $21,000 adjustment from above,

means that the basis is $42,000.

And then just for completeness,

we can show that the basis in the final asset is $15,000 cash.

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